I am planning to buy a property and turn it to my PPOR and change my current PPOR to IP. I just refinanced my current loan 2 months ago and it only has a redraw facility and I have put all my extra money including salaries into the loan. I just realise that this additional repayment will impact my tax deductibility on the IP.
One broker suggested me to refinance the current loan into a loan with an offset account to the max 80% of property value. put the extra repayments in the offset account until I settle the next PPOR. Then get a new loan for this PPOR and move the offset account to the new PPOR loan. The IP loan then switch into the standard loan.
Can you please share your thoughts if the above a risky proposal (to refinance my loan only after a few months getting it)? My concern is how it will impact my credit history and if this new IP loan still won't enable me to get the full tax deductibility from the IP (i.e. not allowed by ATO) then there is no point of refinancing and pay all the costs.
Does anybody know if offset account is offered on its own (without the professional package). I don't need all the credit card or other items in the package and hoping to lower my cost.
Thanks.
Hi Bella
If your current property is going to turn into an IP then switching to an interest only with offset product is a good idea.
If you are going to use the equity in your current property towards your next, then it's a good idea to access it now. I would set this equity release up as a second loan though – so you can distinguish your future tax deductible debt (current loan) from your future non-deductible debt (the equity release for the next PPOR).
There will be costs involved in refinancing – these generally include the outgoing lenders exit fee (despite what many think – there is still usually an admin charge for leaving, it's the Deferred Establishment Fees (DEF) which have been abolished), there's minor govt. fees and there may also be upfront fees with the new lender. If a broker wrote your other loan, they will be receiving a commission claw back because you're closing down the loan after only two months. You will need to check whether you'll be liable for paying back this claw back – if so, they would have provided you with written notification (should be via a credit quote).
There are offset products that don't incur an annual professional package charge – however, without knowing your particular situation, it's difficult to know whether they are suitable for you.
Cheers
Jamie
Jamie Moore | Pass Go Home Loans Pty Ltd
http://www.passgo.com.au
Email Me | Phone MeMortgage Broker assisting clients Australia wide Email: [email protected]
Refinancing won't change deductibility but withdrawing money paid into a loan will. You cannot take out money you parked in redraw and have the interest on this portion deductible even if you had good intentions and the period was short.
Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
http://www.Structuring.com.au
Email MeLawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://www.Structuring.com.au
Jamie and Terrie, thanks for your thoughts.
Jamie, what do you mean by "I would set this equity release up as a second loan though – so you can distinguish your future tax deductible debt (current loan) from your future non-deductible debt (the equity release for the next PPOR)." Does this mean I need to split my loan from IP? That would be what the broker proposed. But he would change the IP loan from one with offset to a standard loan once the new PPOR (new loan) settled so that that the offset loan can be just set up under my new PPOR.
Thanks.
Hiya
When are you buying the next property?
The current structure would be:
Loan 1: Current loan converted to interest only
Loan 2: Equity release for new PPORLoan 1 will be deductible once your current property becomes an IP.
Loan 2 won't be deductible because it's being used towards your new PPOR.
If you didn't split the two loans out like this – it would be difficult to work out which portion of the interest on the loan is deductible and which isn't.
Cheers
Jamie
Jamie Moore | Pass Go Home Loans Pty Ltd
http://www.passgo.com.au
Email Me | Phone MeMortgage Broker assisting clients Australia wide Email: [email protected]
Thanks Jamie. I am giving myself around 6 months target for my next PPOR. I think the loan split you explained was what the broker proposed. Thanks again.
bella12 wrote:Thanks Jamie. I am giving myself around 6 months target for my next PPOR. I think the loan split you explained was what the broker proposed. Thanks again.No worries – I hope it all works out.
Cheers
Jamie
Jamie Moore | Pass Go Home Loans Pty Ltd
http://www.passgo.com.au
Email Me | Phone MeMortgage Broker assisting clients Australia wide Email: [email protected]
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